The market’s latest comeback may be a “bull trap,” one investor warns.
The major averages erased their losses for the week on Thursday as concerns around China Evergrande’s debt crisis cooled and investors cheered the Federal Reserve’s choice to keep stimulus in place for now.
But investors shouldn’t get too comfortable yet, Joule Financial chief investment officer Quint Tatro told CNBC’s “Trading Nation” on Thursday.
“We’re starting to become concerned with the complacency that we see out there among traders,” said Tatro. He said his firm recently reduced its equity exposure “for the first time in a long time.”
“We’re … getting concerned with this perpetual idea that we’re always going to be bailed out,” he said. “We do think we could see some further downward momentum here, and we’re not getting all excited in this latest snapback rally. We think it could be a little bit of a bull trap, and we’re going to stay a little bit more on the sidelines than we have in the past.”
Though the bounce has been noteworthy, it doesn’t mean stocks are out of the woods, Fairlead Strategies managing partner and founder Katie Stockton said in the same interview.
“The pullback that preceded it did yield short-term breakdowns in the major indices” and individual stocks, she said. “That shows a loss of market breadth that is somewhat concerning suggesting that with these weak seasonal influences at hand, the market probably is in store for additional consolidation here.”
There may not be significant downside risk, but with the latest sell-off putting a damper on intermediate-term momentum, there’s likely some difficulty in store for stocks, Stockton said.
“We’re starting to see some sell signals on the weekly charts that give us pause in using this relief rally as something to add exposure into,” she said. “We’d much prefer to use it to reduce exposure in those stocks that have broken down.”
Both traders agreed that certain commodity plays looked appealing, Tatro in the materials space and Stockton in energy.
“We’re more inclined to go and look for those oversold opportunities in relative terms, and that does include the energy sector,” Stockton said. “Not only have we seen intermediate-term oversold readings that are following the corrective phase, but now, we’re starting to see them turn in terms of momentum. A lot of the energy stocks are clearing their 50-day moving averages.”